European natural gas prices have dropped to levels not seen since the energy crisis began. Europe’s gas benchmark prices in February temporarily lowered to below €23 ($25) per megawatt-hour amid a comfortable supply situation. This drop can be attributed to warmer-than-average temperatures across Europe and continued low levels in industrial and domestic demand for natural gas.
Another contributor has been renewable energy sources, with wind, solar and hydroelectric power boosting their contributions to the region’s energy supply in 2023. Wind generation notably grew by 13% in 2023. Europe’s natural gas inventories are currently 62% full, near the 63% level at the same time last year.
Pricing risks remain, although slight, with the threat of sudden disruptions in the Red Sea region or a potential increase in manufacturing activity. As such, European gas prices will likely remain somewhat susceptible to supply disruptions or increases in demand.
While price volatility reduced industrial activity and eased the transition away from Russian energy due to constrained demand, there are concerns that the recent price decline will not remedy the weak production levels on the continent. Expectations are that industrial demand might not fully return in 2024 or even into 2025. During the two years of the war in Ukraine, gas consumption has declined by 20% across Europe. It remains unclear when confidence in the market will recover and drive a rebound in industrial activity.
Looking to policy changes, Europe could face slightly higher energy prices next winter after a deal to continue the transit of Russian gas to Europe through Ukraine looks set to expire. Russia and Ukraine signed a five-year pipeline transit agreement in 2019 which has continued to supply gas to EU nations despite the war in Ukraine. This deal ends on December 31, 2024, and Ukraine does not plan to renew it. This will likely result in the EU losing about 5% of its total gas imports. Austria, Italy, and Slovakia are the nations that would likely be most impacted, and contingency plans are being created. EU Energy officials have stated that these nations should be able to find alternative sources for supply in the future.
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